Benn Steil


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Lender of Last Resort

August 6, 2009


The U.S. and IMF bailout of Mexico in 1994 is often cited as a textbook example of a successful financial rescue. The economy stabilized allowing Mexico to pay back most of its loans in less than 2 years. In response to the current crisis the Fed took on the role of global dollar lender of last resort by lending to foreign, primarily European, central banks. These loans were paid back more quickly than Mexico’s.

Geo-Graphics: Fed Balance Sheet
Matthews, Sim: Fed Opens Swaps with South Korea, Brazil, Mexico

Update: See Comments


Post a Comment 2 Comments

  • Posted by Rien Huizer

    Interesting, Surprised to see that the relative magnitude of the swaps this time is so close to the Mexico case. The current swap arrangements are mainly to ensure that foreign banks can borow USd from their own CBs to replace autonomous USd funding (which may have been scarce as a result of Lehman and/or the contraction in MM funds). Probably in the Mexico case there were very different circumstances (aggregate CA deficit, unlike the Euro-area; inelastic supply of local capital for stressed banks etc. Despite all the talk about bank weakness in Europe, there is no question that banks can raise capital, if not from the market, from local gvts. The terms and political complications may be difficult of course but the Euro area as a whole is far from nationally insolvent, as Mexico was at the time. I suspect that this was basically a short term shock with Lehmann (as promotor of money machines based on conduits with CDO assets and CP funding) ceasing to operate and the resulting damage to the informal banking system. So, in the mexican case the need for swaps may have existed a lot longer.

    Of course, the non-EUR CBs is a different story, but there are a few tah have not used at all (like Spore)

  • Posted by geographics

    Updated: In fairness your surprise is warranted for two reasons (1) the swap line is the total drawn Fed Swap lines as a percentage of Euro area GDP, as far as I know the bilateral data is not available (maybe it could be implied from the other liabilities line of the ECB but not sure) and (2) the IMF loans to Mexico were supplemented by the US (only showing IMF). Each of these make the Mexico line closer to Fed Swap lines but the relative size is less the point than the fast repayment signaling successful ‘bailouts.’

    Hopefully you’ll tolerate those simplifications (we try to keep the charts relatively simple (read: one axis) so that they will be as understandable as possible). I’ve added a chart that uses data from Brad and Roubini’s ‘Bailouts or Bail-ins?’ to show the IMF+ESF against the Fed Swap lines as a % of all eligible countries. This has the reverse bias on the Fed Swap line of including countries like Singapore (as you noted). I agree that the cases are very different but hopefully the basic point (successful ‘bail-out’; using the term fairly loosely) comes through.

    Thanks for the comments.

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